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The New Exchange Business

Traders Magazine, June 2005

Jamie Selway

Ten years ago, the notion of a for-profit stock exchange was unthinkable. But since then, the invisible hand has pushed the exchange business model from country club to corporate, culminating in the announced NYSE-Archipelago and Nasdaq-Inet mergers. The effect on the marketplace will be profound and positive. Historically, exchanges were organized as not-for-profit clubs that offered proximity to a trading community via a seat or trading permit. Telecommunications and technology devalued proximity. Indeed, by the late 1990s, a group of broker-sponsored, for-profit marketplaces-known as ECNs and ATSs-posed an increasing challenge to legacy exchanges. With technology came a fundamental change in business model. The new marketplaces were run like businesses and responded to client, not member, demands. While derivative marketplaces adopted this for-profit, electronic approach-think Chicago Mercantile Exchange for futures and International Securities Exchange for options-questions remained on the equities side. Did NYSE and Nasdaq "get it?"

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